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Production, Specialization, and Trade.docx

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Boston University
CAS EC 101
Michael Manove

The Production Process  The entire production process is a series of transformations in which the primary factors of production (basic inputs)  Gradually become the final goods* and services** desired by households. o *goods are physical: apples, sewing machines, shirts o **services are intangible: haircuts, medical exam, university lecture  Which inputs are the primary factors of production?  What combinations of goods can be obtained from the available quantities of primary factors? Primary Factors of Production  The primary factors of production are services that households provide as input into the productive process.  The Primary Factors are services (but we often omit the word “services” from their names). o Labor services: Productive work from human beings o Capital Services: from productivity-increasing tools (capital goods). o Land Services: from resources provided by nature o (We think of labor, capital goods and land as being owned and controlled by households.) Availability of Primary Factors  The availability of labor is determined by the population of working-age people and by the labor-force participation rate.  The availability of land is mainly determined by nature.  Capital formation (the creation of tools) is an economic process that we should understand. Capital Formation: The Rabbit Hunter  There was a cave woman who hunted rabbits for a living.  When she saw a rabbit she would dive and try to grab it.  Usually the rabbit escaped.  But when she caught the rabbit, she would kill it and it the raw meat.  On the average, she
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